Whether you are a lender, owner or contractor, your success hinges largely on the development of, and adherence to, effective risk management practices. Among the most important risk allocation tools are properly drafted indemnity and insurance provisions in project documents. This article describes the basics of additional insured requirements, which are frequently overlooked but are central elements of these provisions, and identifies ways to ensure that additional insured status is properly documented.
What Is an Additional Insured?
There are three categories of insureds under a typical commercial general liability policy: (i) named insureds; (ii) automatic insureds; and (iii) additional insureds. Named insureds are those individuals or entities to whom the policy is issued. Named insureds typically have more rights and responsibilities than additional insureds and are also subject to more exclusions. Automatic insureds are individuals or entities who are automatically provided with insured status in the policy by virtue of having close ties to the named insured, such as the named insured’s directors, officers, and employees. Additional insureds are individuals or entities who require insured status under another party’s insurance program in conjunction with a business relationship.
Additional insured status provides a party with the benefits of insurance coverage obtained by another party, usually under the latter’s commercial general liability (CGL) insurance. While the requirement for such status has become commonplace, especially in the construction and commercial leasing arenas, the extent of coverage received by the additional insured depends on what the party requires in its contracts and what the other party’s insurer is willing to provide. The actual scope of coverage is determined by reference to the policy’s additional insured endorsement, as well as the other terms of the policy. Generally speaking, there is no premium cost associated with securing this status.
Why Seek Additional Insured Status?
There are myriad reasons for requiring additional insured status under another party’s liability policies. Additional insured status under another party’s insurance shifts the risks to the party that is undertaking activities independent from and unsupervised by the additional insured. For example, it reinforces indemnity provisions by providing the additional insured with protection in the form of direct rights under the indemnitor’s policy. Additional insured status also provides the additional insured with the right to an immediate defense (without affecting policy limits) by the named insured’s insurer, rather than seeking reimbursement of defense costs from an indemnitor. Further, if a court finds that an indemnification clause is unenforceable, the putative indemnitee may still enjoy the intended protection through its status as an additional insured (subject, of course, to the terms and conditions of the indemnitor’s policy).
Other reasons to require additional insured status include the following:
- It may prohibit the indemnitor’s insurer from subrogating against the indemnitee when a loss is caused by the indemnitee’s acts or omissions.
- Insured losses may not affect the “loss history” of the additional insured, thus enabling it to avoid related increases in insurance premiums.
- It may substantially increase the limits of insurance available to the additional insured for a given operation or project.
- It may lessen the chance that the additional insured will be forced to sue the indemnitor directly to be made whole following a claim or suit.
- It may increase the chances of cooperation between the indemnitor and indemnitee in the event of a claim or suit.
How Does an Entity Become an Additional Insured?
Under most circumstances, a person must be an insured under a liability insurance policy to obtain protection under that policy. Generally speaking, one cannot attain additional insured status under a liability policy without some specific language establishing that status. Such status is usually conferred by way of a policy endorsement. Some endorsements, known as “blanket” endorsements, create additional insured status without specifying the precise person or entity who will qualify as an additional insured. For example, some create additional insured status where the named insured agrees in a contract to include another party as an additional insured. While standard Insurance Services Office (ISO) additional insured endorsements have been available for use in conjunction with CGL policies for many years, in the early 1990s, ISO began scaling back the coverage provided under the endorsements. Because of this, the specific edition date of each endorsement may play a critical role. For instance, while the most frequently used ISO “blanket” additional insured endorsements are the current CG 20 10 and CG 20 37 forms, the CG 20 10 11 85 (the November 1985 version) endorsement provides by far the most comprehensive additional insured coverage available.
Ensure that Completed Operations Coverage Is Properly Addressed.
An additional insured will want coverage for liability associated with the indemnitor’s work in progress (e.g. a project owner, for the work being performed by the general contractor, or a general contractor, for the work being performed by a subcontractor). But the additional insured also faces a continuing liability exposure from the indemnitor’s work even after that work is completed. Damage to the project itself (or to contents) from faulty construction and bodily injury to occupants of a building from defects or dangerous conditions associated with the construction can occur after the project is turned over to the owner. Additional insured coverage for this “completed operations” exposure is one of the most important issues in construction risk management.
When they were introduced in 1986, standard construction-industry additional insured endorsements like the CG 20 10 provided coverage to the additional insured in connection with the named insured’s “work.” The CGL policy defines the named insured’s work, “your work,” in such a manner as to include work that has been completed. In other words, additional insured endorsements originally included completed operations coverage. In 1993, however, the CG 20 10 was revised in an effort to remove completed operations coverage from the endorsement. In response, in 2001 ISO promulgated an endorsement (the CG 20 37 form) designed specifically to insure an additional insured’s liability in connection with the named insured’s completed operations. Thus, it is now necessary to seek additional insured coverage either under the 1986 version of the CG 20 10 (which includes completed operations coverage) or to insist that both the CG 20 10 and CG 20 37 forms are endorsed to the policy.
No Need to be Included as an Additional Insured Under Auto Policies; Coverage Already Exists Without Any Action.
The “Who is an Insured” section of most commercial auto policies creates three categories of insureds: (i) the named insured (“you”); (ii) various persons using a covered auto owned, hired or borrowed by the named insured with the named insured’s permission (the “permissive user” category of insureds); and (iii) anyone liable for the conduct of an insured in either of the other two categories (i.e., the named insured or an insured permissive user) to the extent of that liability. It is the third of these categories that extends insured status to anyone who may incur vicarious liability for the conduct of another insured and that commercial auto policy insureds may look to in complying with contractual demands that they provide additional insured status to another party.
Note that the insured is not required to take any specific action to arrange insured status for “additional insureds” under a commercial auto policy. In this respect, the commercial auto policy is different from, and more convenient than, the CGL in the way it addresses insured status for the named insured’s indemnitees. It builds such coverage into the form itself, without the need for an endorsement. In fact, because it automatically includes as an insured anyone liable for the named insured’s conduct to the extent of such liability, no contractual requirement of additional insured status is even necessary to trigger this feature of commercial auto policy coverage.
Don’t Rely on Certificates of Insurance.
It is common for owners and contractors to rely on a cursory review of certificates of insurance to “confirm” compliance with insurance requirements. This practice is extremely risky, as many insurance certificates include incorrect and/or incomplete information, such as omitting mention of risk-changing exclusions or endorsements. In addition, most certificates of insurance are prepared using an industry-standard form. Courts have found that these forms are so replete with express disclaimers that they are not legally binding on the party providing them. As such, it is advisable to require not only a certificate of insurance and endorsements evidencing the proper additional insured status, but also a copy of the applicable insurance policies. Performing a diligent review of the information provided will greatly diminish, if not remove, the anguish, costs and lost time suffered upon discovery, after a claim is made, that the coverage identified in the certificate of insurance is not what the actual policies provide, and is not what was required under the relevant contract.
Confirm that the Additional Insured Status Meets Your Contractual Requirements.
Additional insureds should confirm that the additional insured coverage is as broad, or broader, than the contractually required coverage. On the flip side, if you are obligated under a contract to include an entity as an additional insured under your CGL policy, make sure that you do not inadvertently provide additional insured coverage broader than that required. Many parties to a construction project fail to adequately confirm that insurance requirements have been satisfied, either upon execution of the contract or throughout the duration of the project. Additional insured provisions provide no benefit if they were not obtained or are permitted to lapse.